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Chapter 15: Problem 7

Why might a firm making a large economic profit from its existing product employ a fast-second strategy in relationship to new or improved products? What risks does it run in pursuing this strategy? What incentive does a firm have to engage in \(\mathrm{R} \& \mathrm{D}\) when rivals can imitate its new product?

Short Answer

Expert verified
A firm might use a fast-second strategy to reduce R&D costs and risks but risks losing market dominance. It engages in R&D to gain competitive advantages through innovation and proprietary technologies.

Step by step solution

01

Understanding the Fast-Second Strategy

The fast-second strategy is a business tactic where a firm waits for a competitor to innovate before quickly following with its own version of the product. This allows the firm to learn from the first mover's experiences and avoid the high costs and risks associated with initial research and development.
02

Benefits of the Strategy

By employing a fast-second strategy, a firm can capitalize on the competitor's market validation, reduce investment in R&D, and avoid the inherent risks of being first to market. This strategy offers a chance to refine product features based on observable market responses to the first mover.
03

Risks in Pursuing Fast-Second Strategy

The main risks include potential loss of market share to the first mover and the possibility that the first mover solidifies brand loyalty and market dominance. Additionally, if the first mover's product creates a high barrier to entry, it can be difficult for a fast-second firm to gain a significant market presence.
04

Incentives for Engaging in R&D

Despite the possibility of imitation, engaging in R&D can lead to proprietary technologies, patent protection, and brand enhancement, providing competitive advantages. Pioneering new technologies can position a firm as a leader and innovator, expanding its market influence regardless of subsequent imitators.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

R&D Incentives
Research and Development (R&D) is crucial for companies aiming to thrive in competitive industries. Investing in R&D allows companies to innovate and potentially develop breakthrough technologies. These innovations can lead to unique products or improvements that set a company apart from competitors. Even when rivals may imitate a successful product, engaging in R&D provides several potential benefits:

  • **Proprietary Technologies**: Creating exclusive technologies can give a company a legal edge through patents or trade secrets, safeguarding its innovations from direct imitation for a certain period.
  • **Brand Differentiation**: Investing in R&D reinforces a company's image as an innovator, enhancing its brand appeal and attracting more customers interested in new and advanced products.
  • **Market Position**: Leading in technological advancements can position a firm as a market leader, strengthening its influence and ability to set industry standards.
If a company does not engage in sufficient R&D, it risks falling behind in technological advances that might shape future market dynamics.
Market Entry Barriers
Market entry barriers refer to obstacles that make it difficult for new entrants to enter an industry or compete effectively. These barriers are crucial to understand in the context of a fast-second strategy, since they can greatly affect a company's ability to gain market share. Some common market entry barriers include:

  • **High Initial Investment**: Industries that require substantial capital investment can deter newcomers who may not have the financial resources to compete.
  • **Strong Brand Loyalty**: Established companies with significant customer loyalty can create barriers for new entrants, as consumers may prefer known brands.
  • **Regulatory Hurdles**: Navigating regulations and obtaining necessary certifications can be time-consuming and costly for new entrants.
When a firm employs a fast-second strategy, it must thoroughly assess these barriers to judge whether entry is feasible and sustainable, especially if the first mover has already established a considerable market presence.
Brand Loyalty
Brand loyalty is a key factor in customer retention and can have a powerful impact on a firm's success, especially when employing a fast-second strategy. Loyal customers are more likely to continuously purchase a brand's products, even when competing options are available. Several factors contribute to strong brand loyalty:

  • **Quality and Consistency**: Consistent delivery of high-quality products fosters trust, encouraging repeat purchases.
  • **Effective Marketing**: Building a strong brand image through marketing efforts helps reinforce customer preference for a brand.
  • **Customer Engagement**: Creating a sense of community and personalized customer interactions strengthens emotional ties to the brand.
For a company pursuing a fast-second strategy, the presence of strong brand loyalty toward the first mover can present a significant hurdle. Gaining consumer trust and loyalty requires distinct value propositions and potentially creative marketing strategies to convert customers from the competition.
Innovation Risks
Engaging in innovation comes with its share of risks, and understanding these is crucial when considering a fast-second strategy. If a company decides not to be a first mover, it aims to mitigate some of these risks by learning from its competitor. However, risks remain, such as:

  • **Market Uncertainty**: There's always a risk that a new product might not be well-received by the market, resulting in financial losses.
  • **Resource Allocation**: Innovations require significant resources, including time, money, and talent, leading to potential misallocations if the innovation does not pay off.
  • **Competitive Disadvantages**: First movers can dominate customer attention and set market standards, making even a slight delay in market entry challenging for subsequent innovators.
Despite these risks, the potential rewards of successful innovation, such as capturing market share and establishing technological leadership, often outweigh them. Companies must carefully balance risk and innovation to maximize their strategic advantages.

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Most popular questions from this chapter

Make a case that neither pure competition nor pure monopoly is conducive to a great deal of R\&D spending and innovation. Why might oligopoly be more favorable to R\&D spending and innovation than either pure competition or pure monopoly? What is the inverted-U theory of \(\mathrm{R} \& \mathrm{D},\) and how does it relate to your answers to these questions?

What is meant by technological advance, as broadly defined? How does technological advance enter into the definition of the very long run? Which of the following are examples of technological advance, and which are not: an improved production process; entry of a firm into a profitable purely competitive industry; the imitation of a new production process by another firm; an increase in a firm's advertising expenditures?

Explain: "The success of a new product depends not only on its marginal utility but also on its price."

Contrast the older and the modern views of technological advance as they relate to the economy. What is the role of entrepreneurs and other innovators in technological advance? How does research by universities and government affect innovators and technological advance? Why do you think some university researchers are becoming more like entrepreneurs and less like "pure scientists"?

Do you think the overall level of \(\mathrm{R} \& \mathrm{D}\) would increase or decrease over the next 20 to 30 years if the lengths of new patents were extended from 20 years to, say, "forever"? What if the duration were reduced from 20 years to, say, 3 years?
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